AutoZone Pulling Back Into the Buy Zone

Key Points

• AutoZone had a solid quarter, but results are mixed relative to consensus, and shares are pulling back.
• The uptrend is intact and will likely result in a buy-signal soon. 
• Cash flow and massive share buybacks support the uptrend and point to a new all-time high before year-end. 

AutoZone NYSE: AZO share prices are declining because the Q3 results weren’t strong enough. The company says the timing of tax payments and cold weather impacted the results, which are one-off, non-recurring factors that have little to do with the outlook.

The outlook for AutoZone is the same as it has been: steady growth and solid cash flow, share repurchases, and an uptrending stock price. In this scenario, AutoZone investors should cheer the news because it creates another buying opportunity in a high-quality growth story. The stock price may fall today, this week, and this month, but the uptrend is intact, and the rebound is coming. AutoZone $3,000 is still in play. 

AutoZone Falls on Mixed Results; Repurchases Remain Robust

AutoZone had a decent quarter, but the results are mixed regarding the analysts' forecasts. The $4.24 billion net revenue is up 3.7% compared to last year but missed consensus by 160 basis points. The caveat is that conditions and not demand impacted comps in the US, which were flat; the International business grew at an 18% comparable rate compounded by new stores. Systemwide, comps are up 0.9%, compounded by forty-five net new retail stores. 

Margin is among the best news items in the report. The company widened its gross margin by 102 basis points primarily due to improved merchandise margin. Operating expenses increased YOY but only 0.7% to lag the top-line advance. The net result is a 4.9% increase in operating profits and a 7.5% increase in GAAP earnings aided by share repurchases. AutoZone doesn’t give guidance but has momentum going into the all-important summer season. Growth is expected to return to the mid-single-digit pace the company has posted for the last year. 

AutoZone doesn’t pay a dividend but is an aggressive share repurchaser who bought back $735 million in Q3. Repurchases in F2024 are within the company’s free cash flow, allowing for business growth while maintaining a healthy balance sheet. 

The balance sheet highlights include a flat cash position, low leverage, and an increasing deficit. As with Lowe’s Companies NYSE: LOW, the increasing deficit isn’t a red flag but the result of massive share buybacks and share retirement. The company spends lots of money on what is effectively nothing, shares that no longer exist; the benefit for shareholders is that the company's value continues to rise, and there are fewer shares, providing leverage for capital gain. 

Analysts Support the Uptrend in AutoZone

The analysts were slow to issue revisions following the release, suggesting there is little to change in the outlook. As it is, the eighteen analysts tracked by Marketbeat.com have this stock pegged at Moderate Buy. The Moderate Buy rating has been steady for at least twelve months and comes with an upwardly trending price target. The price target implies about 11% upside from the current price action, enough to put the market back at its all-time high. A move to new highs is possible but may not come until later in the year after Q4 results are released. 

The market is moving lower and may continue to fall. However, institutional support is solid for this stock and will likely step in to support the price when it reaches critical levels. The best target for solid support is near $2,700 and an uptrend line in place since 2020. If that level fails to hold the market, the stock price could fall to $2,600 or lower before finding solid support. In that scenario, the uptrend would still be intact, but the market may enter a consolidation that keeps it range bound for the next few quarters or longer. A rebound should form soon after if the market confirms support at the uptrend line.